Question

600 metric tonne of raw material, costing RM430,032, were input to a process in a period. Conversion costs totalled RM119,328. Losses, in the form of reject product, are normally 12% of input. Reject product is sold for RM260·00 per metric tonne. 521 metric tonne of finished product passed inspection in the period. The remaining output was sold as reject product. There was no work-in-progress either at the beginning or the end of the period. Required: For the period:

(a) Calculate the cost per unit of normal output. [10 marks]

(b) Prepare the process account, including any abnormal losses/gains. [10 marks]

(c) Explain how the cost of the previous accounting period’s equivalent units is assigned into the work-in-process inventory using the First-In, First-Out [FIFO] process-costing method. [6 marks]

(d) Briefly state a distinctive feature of the FIFO process-costing method when dealing with work done on opening inventory. [4 marks]

Answer 1

a )

Total cost = Raw material + conversion costs = RM 430032 + RM 119328 = RM 549360

Input = 600 tonne

Normal loss = 12 % of input = 600 * 12% = 72 tonne

Therefore , normal output = Input - normal loss = 600 - 72 = 528 tonne.

Realisation from normal loss = 72 * RM 260 = RM 18720 ( Seling price of reject product = RM 260 )

Cost per unit of normal output = (Total cost - sale proceeds of normal ouptut) / Normal output

= ( RM 549360 - RM 18720) / 528 tonne. = RM 1005 per tonne

b )

Finished product passed inspection= 521 tonne

Abnormal loss = Input - Normal loss- finished product = 600 - 72 - 521 = 7 tonne

Cost of abnormal loss = Cost per unit * Abnormal loss units = RM 1005 * 7 = RM 7035

Cost of finished goods = Cost per unit * Finished product passed inspection =RM 1005 * 521 tonne = RM 523605

Sale proceeds from normal loss = Seling price of reject product * Normal loss units = RM 260 * 72 = RM 18720

Process Account

Particulars	Units (Tonne)	Amount (RM)	Particulars	Units (Tonne)	Amount (RM)
To Material	600	430032	By Finished Goods	521	523605
To conversion		119328	By Normal loss	72	18720
			By Abnormal loss	7	7035
Total	600	549360	Total	600	549360

c )

Under the FIFO method, the EUP is calculated separately for beginning WIP inventory,started and completed units and ending WIP inventory. The costs related to the beginning WIP inventory is not taken in the calculation of cost per equivalent units of production. Only current period costs are used in the allocation of costs to EUP. The previous period costs are then added separately to the completed units along with the current period costs. The costs incurred during the previous period for the units in BWIP are transferred out in full either to finished goods or to the next process because under the FIFO assumption, first units in BWIP are finished, and then other new units are started.

d)

Under the FIFO method it is assumed that all of the units in beginning work-in-progress at the beginning of the period were completed during the current period before any other new units were started. Thus, under the FIFO method, all of the units that were in BWIP were completed and were transferred out at the end of the period. The costs incurred during the current are allocated between completed units transferred out and units in EWIP. The costs incurred during the current period are allocated according to the work actually done during the period as determined by the equivalent units of production. Since the costs allocated on the basis of equivalent units of production used in the allocation include only the work done during the current period on units in beginning WIP inventory and units started during the period. The work done during the previous period on units in beginning WIP inventory is excluded in the calculation of EUP and from the calculation of current period costs between units completed and units in BWIP.